Tariffs and Trade Wars: Why We Should be Concerned

One
of the key ingredients to maintaining a positive global marketplace is
collegial trade between countries. Many partnerships are strong and create a
win-win situation for all concerned parties.

But,
there are still many countries who cannot come to an agreement about the ratio
of imports to exports between the nations. These disagreements can escalate
into imposed tariffs and the beginnings of a trade war.

So
why should we be concerned about tariffs and trade wars? Here’s what you need
to know.

What
Is a Trade War?

A
trade war occurs when nations enforce quotas or tariffs on imports and foreign
countries retaliate in a similar fashion. As it intensifies, a trade war
stymies international trade.

A
trade war can begin when a nation tries to protect domestic industry and create
jobs, and at times it can work in the short-term. But long-term, a trade war
costs jobs and dampens economic growth for everyone. It can also generate
inflation because tariffs raise the prices of imported goods.

America’s
last major trade war happened after imposition of the 1930 Smoot-Hawley Tariff,
which increased 900 import tariffs from 40-48%. It was supposed to support U.S.
farmers whose land had been devastated by the Dust Bowl, but it resulted in
higher food prices for Americans who were already crippled by the Great
Depression.

America’s
trade partners at the time hit back with their own tariffs and global trade
fell by 65%, worsened the depression, and contributed to the beginning of World
War II.

After
Smoot-Hawley, the country suffered tremendously. The general public had little
understanding of tariffs or trade agreements.

According
to investinganswers.com, “Ad valorem tariffs are calculated as a fixed
percentage of the value of the imported good. When the international price of a
good rises or falls, so does the tariff. A specific tariff is a fixed amount of
money that does not vary with the price of the good. In some cases, both the ad
valorem and specific tariffs are levied on the same product.”

Unfortunately,
taxes on imports and exports make foreign goods more expensive for consumers,
which causes a decrease in imports, a decrease in supplies, and an increase in
the price of the good.

Some
economists will posit that the subsequent higher consumer prices, higher
producer profits and revenues, and higher government revenues show that tariffs
are a way to transfer money from consumers to the government. However, most
economists argue that tariffs restrict free market ideals and divert resources
to domestic businesses that are less efficient than overseas manufacturers.

This
inevitably leads to conflicts between specific countries.

Countries
in Conflict

The
escalation of any trade war from threat to reality affects global supply
chains, increase costs for businesses, as well as consumers, and impact global
stock markets, which are already volatile due to the anticipation of a lengthy
trade fight between the United States and other global trade partners.

In
July of 2018, theUS and China started attacking each other with tariffs. U.S.
tariffs on $34 billion worth of Chinese products took effect, changing a war of
words between China and the US into a full-blown trade war.

President
Donald Trump has stated that another $16 billion in tariffs are expected to be
implemented soon. The President said he is ready to impose additional tariffs
on $500 billion in Chinese goods, if Beijing retaliates. And the trade wars
don’t stop with China.

President
Trump also threatened to impose a 20% tariff on European cars coming to America
ifthe
European Union doesn’t eliminate its trade barriers.

The
European Union has stated that America’s trading partners could retaliate
against approximately $300 billion of US exports if the president decides to
impose tariffs on automobile imports from around the globe.

These
types of spiraling trade conflicts threaten to derail a recovering global
economy, according to the World Trade Organization. In May of 2018, the US
government launched an investigation, into imports of automobiles, known as
Section 232, meant to determine whether specific imports are a danger to US
national security.

According
to cnn.com, “The European Union has said the US investigation ‘lacks
legitimacy, factual basis and violates international trade rules.’ And it has
argued that new tariffs on autos would damage the American economy.”

But,
there is hope on the trade horizon. President Donald Trump has stated that the
United States and the European Union have begun a “new phase” in their
relationship, stating that the two large economies would start negotiating
immediately, working toward “zero tariffs” on industrial products, and further
collaboration on energy concerns.

President
Trump met with European Commission President Jean-Claude Juncker to work toward
an agreement that included zero tariffs, zero non-tariff barriers, and zero
subsidies for the non-auto industrial goods.

Economists
have stated that, among the issues under consideration, tariffs on imported
cars could be a huge threat to the U.S. economy. Juncker agreed that the two
leaders would continue to negotiate and were reconsidering existing tariffs on
steel and aluminum.

Key
details of the arrangement have not been disclosed, but the leaders did agree
not to impose further tariffs while negotiations continue – this would help
stop a trade war between Europe and the United States.

As
reported by CNBC, “. . . it could have been a hell of a lot worse. They agreed
to keep talking. Considering how bellicose Trump was when he said ‘tariffs are
great.’ I think this was the best outcome you could have hoped for,” said Greg
Valliere, global strategist at Horizon Investments. “The reaction from
Republicans on Capitol Hill has been so hostile to Trump’s tariff proposal,
that that maybe was a factor in them agreeing to keep talking.”

As
the world focuses on impending trade wars, consumers are left wondering how
this will affect prices and supply and demand for internationally produced
goods.

How
Does Trade War Affect Me?

The
main way trade wars affect consumers is in consumer goods pricing. The current
trade war has already increased the prices of consumer goods made of aluminum
and steel. Domestic manufacturers that are dependent on imported raw materials
are responding to the higher costs. Since they lose profits when tariffs are
imposed, their only choice is to cut jobs.

But,
the tariffs allow domestic producers of that product to adjust their prices.
Their prices would be lower than those who use imports to produce their goods.
This would result in more orders from local customers and a need to add jobs to
meet the demand.

As
a result of the announced tariffs, several U.S. industries were affected.
Mid-Continent Nail in Missouri was forced into layoffs because steel prices
were too high for them to turn a profit.

Harley-Davidson
is moving some production overseas to avoid retaliatory European Union tariffs.

The
Maine lobster industry is suffering from Chinese retaliatory tariffs on U.S.
harvested seafood. California cheese makers are already seeing their markets in
China and Mexico disappear, Wisconsin auto parts producers are experiencing a
reduction in profits, and the U.S. bourbon industry has also been hit hard by
tariffs.

Foreign
tariffs on U.S. exports make them more costly, and U.S. exporters may have to
take drastic steps to remain competitively priced, including layoffs. If their
steps fail, they may even go out of business.

Long-term,
trade wars stifle economic development and create layoffs as foreign countries
retaliate. There are millions of U.S. workers whose jobs rely on exports – and
they could get laid off.

Jenni
Gillet from Tyler Madison “No tariffs from Taiwan! Still waiting to hear
what Korea and China decide to do. Most companies in the wire rope industry
have implemented price increases of 4-5%”.

Todd
Kritzer from Kady International “Stock items now seem to
be running out for several weeks. The unpredictability of these items is
backing up machine shops and is making it difficult for us to quote
accurately”. Industrial Mixers

Jeff Perrigo
from Western Container Corp. “The Chinese used to buy
up all the recycled paper which spiked prices, but apparently that is not
happening now”. Paper and Cardboard tubes

Bruce
Weaver from Great Lakes Engineering “Small increase of about
5% on aluminum and we hear more are coming through”. Metal Etching

Paul
Beezhold from Esma Inc “We had an increase of 15% on one item and 5%
on another while 3 remaining items had no price increase”. Ultrasonic Cleaners

Dave
Leeney from Sag Harbor Industries “This morning we got a
9.5% increase from Cosmo due to a raw material tariff”. Electric Coils

Doug
Colliver from Western Roller Corp. “Our steel vendor has been
passing along tariffs for the past 2 months and we have been absorbing the
costs”. Rubber
Rollers

While
a short-term trade skirmish can help domestic industries, protracted trade wars
weaken domestic industry, which creates a decline in the quality of products
and removes the incentive for manufacturers to innovate and create new or
improved products.

Conclusion

While
trade wars are messy and have long-term repercussions, the goal is ultimately
to maintain fair trade between nations. Trade is a key element in economic
stability and trade wars affect the health of the economy.

Regardless
of which nations engage in trade wars, their actions ultimately affect the
everyday consumer with fluctuating prices for goods and services. The
instability caused by trade wars has as much potential to damage an economy as
it does to ultimately create a better economic situation for the nations
involved.